Agriculture Reference
In-Depth Information
aggregate and about 26 percent in case of poor households. Given this expen-
diture pattern, price increases lead to a substantial reallocation of aggregate ex-
penditures to these food items and away from other items.
Stabilizing Rice Prices within a Band
This proposal requires approving and implementing an appropriate enabling or-
der that will set the government price for regularly milled rice within a range
consistent with a targeted domestic price band. Under the proposed scheme, up-
ward deviations of market prices from the price band will be corrected with ap-
propriate changes in trade implemented through a scheme of flexible import tar-
iffs, and subsidies, and in-quota rice imports, which will be expanded as
required. Unlike the current practice of using domestic costs of production to
set target price, the price band will primarily be determined by a target whole-
sale price of rice, to be calculated using the world price of rice and a socially
acceptable (and WTO-compatible) tariff protection for rice farmers.
Initially, the annual implicit tariff protection on rice production can be set
as the benchmark, although the government will have to make a decision on the
tariff rate that balances the interests of producers and consumers. Average im-
plicit tariff protection from 1995 to 1999 is presented in Table 7.7. The num-
bers suggest that the estimates vary widely from year to year, with an average
of about 68 percent. The data used for domestic market prices are those for
Metro Manila. Hence, the target price is the world price of rice in local currency
—adjusted for the cost of freight, insurance, and transport from port to first
warehouse—plus the implicit protection rate of 50 percent. Through the years,
this tariff rate may have to be gradually reduced to make the rice market more
integrated and competitive with the world rice market.
The upper and lower limits of the price band will ensure that wholesale
rice prices within the band are tolerable or acceptable to the buying public, such
that they do not have to deal with any substantial reallocation of their house-
hold resources. But how should such a price band be set? Based on an analysis
of the percentage deviation of monthly domestic wholesale rice prices from
their 3-month moving average from 1990 to 1999, shown in Figure 7.1, the lim-
its of the band may be set at plus or minus 5 percent from the target price.
The target price will vary depending on the world price of rice and the ex-
change rate. Changes in the target price, when deemed too abrupt or too steep,
may exceed the expectations of the millions of households in the country,
prompting them to voice their dissatisfaction in ways that would destabilize the
economy. This effect can be illustrated by the 40 percent increase in the target
price that could have materialized between 1997 and 1998 as a result of the
Asian crisis—a situation that would have pushed wholesale prices up by about
Php 5 per kilogram of rice (see Figure 7.2). Furthermore, this figure gives use-
ful information on how target prices may be adjusted from year to year in a way
that is tolerable by the population. Monthly wholesale prices are compared with
